The notion of a consolidated group is known, and generally refers to a group of companies (usually a parent and its subsidiaries) that are merged into a larger reporting unit. Within the consolidated group, the parent company typically owns more than 50% of the common stock of the subsidiaries, and controls them. In the context of financial accounting, the consolidated group reports it operating results on a consolidated financial statement prepared under the U.S. Generally Accepted Accounting Principle (GAAP). The consolidated financial statement refers to the combined financial statements of the parent company and its subsidiaries. It presents the financial position and results of operations of the parent and its subsidiaries as if the consolidated group were a single company with one or more branches. Because the consolidated financial statement presents an aggregated look at the financial position of the consolidated group, the statement generally shows the overall health of the consolidated group as opposed to one company's stand alone position.
It is also known that the consolidated group may finance the acquisition or construction of real or personal property to be leased by one of its subsidiaries. The subsidiary that is leasing the financed property is usually both the user and lessee of the financed property. When the user leases the financed property from an unrelated third party, or purchases the financed property using in whole or part proceeds of a third party loan secured by the financed property, an imputed debt and a corresponding imputed interest charge on its consolidated financial statement arises. Such imputed debt and interest charge may result from treatment of the third party lease as a capital lease under current GAAP rules. Such treatment may also result under future GAAP rules, such as those corresponding to the Financial Accounting Standards Board's (FASB) pending proposed change to lease accounting standards (set forth in FASB Exposure Draft, Proposed Accounting Standards Update, Leases, Aug. 17, 2010 (File Reference: No. 1850-100, Leases (Topic 840)), as amended).
It is desirable to minimize or avoid use of the consolidated group's treasury cash or borrowed funds to purchase or construct a financed property while providing improved earnings and financial ratios (e.g., debt to equity) of the consolidated group, as compared to third party leasing or borrowing arrangements, such that lease obligations imputed by GAAP rules are avoided.